Tapping Into This Fortune Isn’t for the Fainthearted

Waiting to clear customs at Baku’s international airport, Texas-based courier Frank Woeste cradled a package of oil-drill brake pads and seals he had packed into a battered paper bag and hand-carried 9,500 miles from Houston--the only safe way to get the badly needed parts here quickly.

Welcome to the Caspian Sea, the world’s largest landlocked body of water, repository of some of the most plentiful deposits of crude oil and natural gas on Earth. And, for those scrambling to recover those resources, not much else.

Far from the world’s new industrial centers, removed from modern trade routes and largely neglected during seven-plus decades of Soviet rule, the newly independent states bordering the Caspian--Azerbaijan, Kazakhstan and Turkmenistan--pose an unprecedented challenge to the world’s major oil companies and a dazzling array of camp followers hoping to ride a trillion-plus wave of petrodollars.

This challenge is complicated by the two other countries bordering the Caspian, Russia and Iran, both former imperial powers in the region and neither especially accommodating to the needs of international oil giants.

How international businesses now flocking into the region meet these difficulties and how the Caspian nations themselves deal with their sudden wealth will do much to determine the longer-term future of countries expected to provide energy to the industrialized world for much of the next century. It is a drama that especially affects Americans as the United States--and other Western nations--develop important new interests in the Caspian region.

Often, the lack of modern equipment in the area, coupled with the absence of any easy way to import it, makes for primitive working conditions.

“We’re using old Soviet technology that’s in bad condition,” said Marko Filipi, a seasoned Croatian wellhead worker employed by the Larmac & Dragon Oil Co. near Cheleken, Turkmenistan. “The platforms are in bad shape--there’s lots of leaking. I’ve never worked in conditions like this before.”

Neither has British Petroleum executive Mike Shearman.

At a bustling quayside in Baku’s harbor, Shearman pointed to a nearby river barge laden with 800 tons of freshly fabricated steel that he needed as part of a drilling rig refit he was supervising.

The barge had been underway for weeks, he said, slowly working its way southward through Russia’s inland waterways from a construction yard on the Russo-Finnish border 1,800 miles northwest. An early Russian winter would have trapped the cargo until spring.

The Pipeline Challenge

But the difficulty of extracting the Caspian’s riches pales beside the problems of getting them to the open seas and global markets beyond.

No one without billions of dollars and a gambler’s nerve need apply for the job of building the thousands of miles of pipeline that could one day carry Caspian oil and gas through such inhospitable places as Afghanistan, Chechnya and Iran.

China recently concluded a $9.5-billion agreement to develop Kazakhstan’s giant Uzen field in the northern Caspian and conduct a feasibility study of a 2,000-mile pipeline to take the oil east into China’s Xinjiang region.

“If this area is going to fulfill its potential, it’s going to need four or five major export pipelines out to the West and maybe even more than one to the East, because the Chinese market is growing so fast it’s starting to make sense to send it directly to China,” said Iain Reid, a research analyst at NatWest Markets, a London-based company that tracks oil industry developments closely.

But accomplishing this feat will not be cheap. So far, an estimated $20 billion in international capital has already been committed to the task of getting Caspian oil to world markets, and some analysts estimate that more than twice that will flow into the region over the next decade.

Nor will it be easy. Consider BP’s Shearman, whose real job is to explore the large Shah Deniz field southeast of Baku on behalf of a seven-nation consortium headed by BP and Norway’s Statoil.

Normally, he said, he would lease a rig from a contractor to drill the two planned exploratory wells, but because Moscow conducted so little deep-water drilling in the Caspian, there is no rig available and there is no way to bring one in. So before he can even begin the exploration work, he is supervising a $150-million, 18-month overhaul of a derelict Soviet-era rig--one of only two in the entire region.

If the field brings in even half the high-end estimate of 3 billion barrels of oil and 4 trillion cubic feet of natural gas, the investment could yield as much as $35 billion at current market prices.

The lure of such profits makes it easier to overlook the Caspian’s potential pitfalls.

While petroleum geologists believe that the risk of dry holes is far less in the Caspian than elsewhere, that danger does exist. Reid noted a Pennzoil-led consortium recently came up empty in its initial exploration of an offshore field north of Baku. Shearman and others also warn that the high costs of extracting and transporting Caspian oil make it less profitable than most other oil--and thus the first target for production cutbacks in a saturated market.

Robert Ebel, an energy and national security specialist at the Center for Strategic and International Studies in Washington, cautions against “Caspian euphoria.”

“The Caspian basin has considerable potential, but it won’t replace the Persian Gulf,” he said. “It can’t compete in levels of volume, in cost of production or in access to markets. The political risks also aren’t any less, they’re just different.”

Other dangers lurk. International energy companies can expect a new, more local kind of trouble as the bureaucracies of the former Soviet republics jockey for shares of the oil money.

Western diplomats are convinced that Azerbaijan is likely to become as wealthy as the Persian Gulf region in the 21st century. But unlike in the Gulf, where wealth has remained in the hands of tiny groups of elites, Azerbaijan’s Soviet legacy, they say, is dozens of big, competing, unwieldy bureaucracies, each filled with officials running tiny paper fiefdoms and eager to increase their own power and wealth at the expense of the others.

“What oil companies like is a regime in which power is shared between as few local officials as possible, giving fewer opportunities for corruption,” one diplomat said. “In fact, what they would really need is stable dictatorships. That makes Azerbaijan far from ideal.”

A Taste for Profit

In the shallow northern portions of the Caspian, oil companies encounter a touchy environmental problem in protecting schools of sturgeon whose eggs are one of the world’s most sought-after culinary delicacies: caviar. Soviet-era pollution, overfishing and rampant poaching in a part of the world where law enforcement is, at best, haphazard have already combined to diminish the sturgeons’ numbers.

So far, none of this has slowed an oil rush that has already drawn some of the oil industry’s biggest names, including American oil majors Exxon, Amoco, Chevron, Unocal, Mobil, Arco and Pennzoil. It has also attracted individuals such as Roger Tamraz, a Middle East-born entrepreneur with an array of criminal charges hanging over his head in other countries who traded U.S. election campaign contributions for White House access and the chance to peddle a lucrative pipeline scheme.

“I am an American citizen trying to get Caspian Sea oil to Western markets,” Tamraz told a Senate hearing in September.

Energy specialist Ebel said, “There are hustlers in there now, and when oil-derived revenue starts coming back, it’s going to bring even more hustlers.”

The remoteness of the Caspian region and its lack of contact with the outside world have created a lucrative opening for some of the United States’ most distinguished former diplomats and other former public servants--who are among the few Americans who know the region’s leaders--to act on behalf of oil companies or other businesses hoping to ride the bonanza.

Former National Security Advisor Zbigniew Brzezinski, for example, is retained by Amoco, a major shareholder in two Azerbaijani oil consortiums. Brzezinski has known Azerbaijani President Heydar A. Aliyev since the Soviet era, when Aliyev was a Politburo member.

“It’s not unusual to seek the advice of people who have experience and know the key people,” said Amoco’s senior executive in the region, Charles Pitman. The local pull of people such as Brzezinski is also unmistakable.

Familiar Faces

Aliyev’s most senior foreign policy advisor, Vafe Guluzade, displays Brzezinski’s books on a special shelf in his presidential palace office and speaks of him proudly as “my good friend.”

“He accepts our realities. He understands the role of the [Caspian countries] and the role of Russia,” Guluzade said. “I like him very much.”

Among other former senior U.S. officials now involved commercially in the Caspian are Brent Scowcroft (former national security advisor, retained by Pennzoil as a consultant); James A. Baker III (former secretary of State, whose Houston law firm, Baker & Botts, represents the largest international oil consortium operating in Azerbaijan); Arthur Hartman (former U.S. ambassador to Moscow, chairman of a company that buys oil from Turkmenistan and transports it across the Caspian to a pipeline at Baku); and Richard Holbrooke (former assistant secretary of State, employed by Credit Suisse First Boston, a potential participant in pipeline financing).

The breadth of this involvement effectively removes some of the most respected figures in American foreign affairs from the ranks of detached observers at a time when the United States is moving swiftly into dangerous and--for it at least--largely uncharted political waters.

Such activities are not restricted to American political figures. Former British Cabinet members Malcolm Rifkind and Tim Eggar serve as oil consultants.

The Caspian oil rush has also spawned a mini-industry of seminars, conferences, high-priced think-tank reports and newsletters devoted exclusively to pumping out information about the obscure region.

A Los Angeles-based group called the Russian Petroleum Investor, which began publishing a monthly intelligence report six years ago on the Russian energy sector, branched out a year ago with a series of special reports on the Caspian. Last September, it launched a 32-page monthly newsletter titled the Caspian Investor.

Despite an annual subscription rate of $1,495, marketing director James Cullen claims that circulation is doubling monthly.

“There’s a lot of excitement out there now,” he said. “Things are beginning to happen.”

Marshall was recently on assignment in Baku. Times staff writer Vanora Bennett contributed to this report.

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About This Series

While the possibility of new, world-class oil strikes seems very promising in the Caspian Sea region, the potential for political headaches is rife.

* Monday--As the United States moves to the forefront of the Caspian oil rush, the stakes--economic and political--are high.

* Tuesday--A portrait of the fiercely independent inhabitants of this volatile region, one that has been racked by ethnic strife.

* Today--Oil companies face unprecedented challenges in resource-rich territory neglected during decades of Soviet rule.

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Sea of Promise

Thousands of miles of pipeline will be needed to transport the Caspian’s riches to world markets. The routes will alter the delicate political balance in an already unstable region by adding to the power of the nations that control them.